----

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**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

----

**FORM 10-Q**

**(MARK ONE)**
| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|

 

**FOR THE QUARTERLY PERIOD ENDED:JUNE 30, 2001or**
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------|

 

**FOR THE TRANSITION PERIOD FROM______________ TO ______________**

**COMMISSION FILE NUMBER 000-31145**
|                                                         |
|---------------------------------------------------------|
| **VERSICOR INC.**                                       |
| (Exact  Name of Registrant as Specified in its Charter) |

 

| **DELAWARE**                                                    | **04-3278032**                           |   |
|-----------------------------------------------------------------|------------------------------------------|--------|
| (State  or Other Jurisdiction of Organization or Incorporation) | (I.R.S.  Employer Identification number) |   |
|                                                            |                                     |
| **34790 ARDENTECH COURT, FREMONT, CALIFORNIA 94555**            |                                     |
| (Address  of Principal Executive Offices) (Zip Code)            |                                     |
|                                                            |                                     |
| **(510) 739-3000**                                              |
| (Registrant's  Telephone Number, Including Area Code)           |
|                                                                 |

 

    Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

    Indicate the number of shares outstandingof each of the issuer's classes of common stock, as of the latest practicabledate.

    COMMON STOCK, PAR VALUE $.001 PER SHARE,23,082,087 SHARES OUTSTANDING ATAUGUST 1, 2001.

 

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**VERSICOR INC.INDEX**

 

| **Part I - Financial  Information**                                       |   |
|---------------------------------------------------------------------------|--------|
|                                                                      |   |
| Item 1.  Condensed Financial Statements                                   |   |
|                                                                      |   |
| Condensed Balance Sheets as of  June 30, 2001 (Unaudited) and             |   |
| December 31, 2000                                                         |   |
|                                                                      |   |
| Statements of Operations for  the Three and Six Months Ended              |   |
| June 30, 2001 and 2000  (Unaudited)                                       |   |
|                                                                      |   |
| Statements of Cash Flows for  the Six Months Ended                        |   |
| June 30, 2001 and 2000  (Unaudited)                                       |   |
|                                                                      |   |
| Notes to  Condensed Financial Statements                                  |   |
|                                                                      |   |
| Item  2. Management’s Discussion and Analysis of Financial Condition |   |
| and  Results of Operations                                                |   |
|                                                                      |   |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk       |   |
|                                                                      |   |
| **Part II -  Other Information**                                          |   |
|                                                                      |   |
| Item 1. Legal Proceedings                                                 |   |
|                                                                      |   |
| Item 2.  Changes in Securities and Use of Proceeds                        |   |
|                                                                      |   |
| Item 3. Defaults upon  Senior Securities                                  |   |
|                                                                      |   |
| Item  4. Submission of Matters to a Vote of Security Holders              |   |
|                                                                      |   |
| Item 5. Other Information                                                 |   |
|                                                                      |   |
| Item 6. Exhibits and Reports  on Form 8-K                                 |   |
|                                                                      |   |
| Signatures                                                                |   |
|                                                                      |   |

 

**ITEM 1. CONDENSED FINANCIALSTATEMENTS**

**VERSICORINC.CONDENSED BALANCE SHEETS(IN THOUSANDS)** 

|                                        | June  30,                                  |   | December  31, |   |
|---------------------------------------------|--------------------------------------------|--------|---------------|--------|
|                                        | 2001                                       |   | 2000          |   |
|                                        | ****                                       |   | ****          |   |
|                                        | (unaudited)                                |   |          |   |
| **ASSETS**                                  |                                       |   |          |   |
| Current assets:                             |                                       |   |          |   |
|                                        | Cash and cash  equivalents                 | $      | 51,153        |   | $ | 67,989 |   |
|                                        | Marketable securities                      | 23,152 |          | 17,945 |   |
|                                        | Employee notes  receivable                 | 356    |          | 357    |   |
|                                        | Prepaid expenses and  other current assets | 801    |          | 591    |   |
|                                        | ****                                       |   | ****          |   |
|                                        | Total current assets                       | 75,462 |          | 86,882 |   |
| Property and  equipment, net                | 5,132                                      |   | 4,384         |   |
| Employee notes  receivable                  | 138                                        |   | 188           |   |
| Other assets                                | 158                                        |   | 142           |   |
|                                        | ****                                       |   | ****          |   |
|                                        | Total assets                               | $      | 80,890        |   | $ | 91,596 |   |
|                                        |                                            |   |               |   |
| **LIABILITIES  AND STOCKHOLDERS' EQUITY**   |                                       |   |          |   |
| Current liabilities:                        |                                       |   |          |   |
|                                        | Accounts payable                           | $      | 1,060         |   | $ | 1,421 |   |
|                                        | Accrued liabilities                        | 3,815  |          | 3,225  |   |
|                                        | Related party payable                      | -      |          | 12     |   |
|                                        | Current portion of  term loan payable      | 862    |          | 862    |   |
|                                        | Deferred revenue                           | 1,778  |          | 1,233  |   |
|                                        | ****                                       |   | ****          |   |
|                                        | Total current  liabilities                 | 7,515  |          | 6,753  |   |
| Deferred revenue                            | 500                                        |   | 108           |   |
| Term loan payable                           | 3,017                                      |   | 3,448         |   |
| Other long-term  liabilities                | 43                                         |   | 1,000         |   |
|                                        | ****                                       |   | ****          |   |
|                                        | Total liabilities                          | 11,075 |          | 11,309 |   |
|                                        |                                       |   |          |   |
| Stockholders' equity:                       |                                       |   |          |   |
| Common stock                                | 23                                         |   | 23            |   |
| Additional paid-in  capital                 | 161,492                                    |   | 160,059       |   |
| Deferred stock  compensation                | (6,933                                     | )      | (8,819        | )      |
| Accumulated other  comprehensive income     | 17                                         |   | -             |   |
| Accumulated deficit                         | (84,784                                    | )      | (70,976       | )      |
|                                        | ****                                       |   | ****          |   |
|                                        | Total stockholders'  equity                | 69,815 |          | 80,287 |   |
|                                        | ****                                       |   | ****          |   |
| Total liabilities and  stockholders' equity | $                                          | 80,890 |          | $      | 91,596 |   |
|                                        |                                            |   |               |   |
|                                             |                                            |        |               |        |  |  |  |  |

 

 

 

The accompanying notes are an integral part ofthe condensed financial statements.

 

 

 

 

**VERSICORINC.STATEMENTS OF OPERATIONS(UNAUDITED)(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)**

       

|                                                          |                                                                  |   |              |   |      |   |         |    |         |
|---------------------------------------------------------------|-----------------------------------------------------------------------|--------|-------------------|--------|-----------|--------|--------------|---------|--------------|
|                                                          | Three  Months Ended                                                   |   | Six  Months Ended |   |      |
|                                                          |                                                                       |   |                   |   |      |
|                                                          | June  30,                                                             |   | June  30,         |   | June  30, |   | June  30,    |    |         |
|                                                          | 2001                                                                  |   | 2000              |   | 2001      |   | 2000         |    |         |
|                                                          |                                                                       |   |                   |   |           |   |              |    |         |
| Revenues:                                                     |                                                                  |   |              |   |      |   |         |    |         |
|                                                          | Collaborative research  and    development and contract services | $      | 1,554             |   | $         | 1,301  |         | $       | 3,040        |   | $ | 2,551 |   |
|                                                          | License fees and  milestones                                          | 259    |              | 259    |      | 267    |         | 267     |         |
|                                                          |                                                                       |   |                   |   |           |   |              |    |
|                                                          | Total revenues                                                        | 1,813  |              | 1,560  |      | 3,307  |         | 2,818   |         |
|                                                          |                                                                       |   |                   |   |           |   |              |    |
|                                                          |                                                                  |   |              |   |      |   |         |    |
| Operating expenses:                                           |                                                                  |   |              |   |      |   |         |    |
|                                                          | Research and  development - non-cash compensation expense        | 682    |         | (19    |  )   | 1,195  |    | 1,212   |    |
|                                                          | Research and development  - other                                     | 8,146  |              | 2,556  |      | 12,959 |         | 4,962   |         |
|                                                          |                                                                  |        |              |        |      |        |         |         |         |
|                                                          | Total research and  development                                       | 8,828  |              | 2,537  |      | 14,154 |         | 6,174   |         |
|                                                          |                                                                  |        |              |        |      |        |         |         |         |
| General and  administrative - non-cash   compensation expense | 893                                                                   |   | 1,731             |   | 2,109     |   | 2,810        |    |
|                                                          | General and administrative  - other                                   | 1,565  |              | 515    |      | 2,804  |         | 1,084   |         |
|                                                          |                                                                  |        |              |        |      |        |         |         |         |
|                                                          | Total general and  administrative                                     | 2,458  |              | 2,246  |      | 4,913  |         | 3,894   |         |
|                                                          |                                                                  |        |              |        |      |        |         |         |         |
|                                                          | Total operating  expenses                                             | 11,286 |              | 4,783  |      | 19,067 |         | 10,068  |         |
|                                                          |                                                                  |        |              |        |      |        |         |         |         |
|                                                          |                                                                  |   |              |   |      |   |         |    |
| Loss from operations                                          | (9,473                                                                | )      | (3,223            | )      | (15,760   | )      | (7,250       | )       |
|                                                          |                                                                  |   |              |   |      |   |         |    |
| Other income  (expense):                                      |                                                                  |   |              |   |      |   |         |    |
|                                                          | Interest income                                                       | 913    |              | 593    |      | 2,132  |         | 1,182   |         |
|                                                          | Interest expense                                                      | (82    | )                 | (122   | )         | (180   | )            | (242    | )            |
|                                                          | Other income                                                          | -      |              | 18     |      | -      |         | 18      |         |
|                                                          |                                                                       |   |                   |   |           |   |              |    |
| Net loss                                                      | (8,642                                                                | )      | (2,734            | )      | (13,808   | )      | (6,292       | )       |
|                                                          |                                                                       |   |                   |   |           |   |              |    |
| Accretion of dividends  on preferred stock                    | -                                                                     |   | (1,436            | )      | -         |   | (2,871       | )       |
|                                                          |                                                                       |   |                   |   |           |   |              |    |
| Net loss available to  common stockholders                    | $                                                                     | (8,642 | )                 | $      | (4,170    | )      | $            | (13,808 | )            | $ | (9,163 | ) |
|                                                          |                                                                       |   |                   |   |           |   |              |    |
| Net loss per share:                                           |                                                                  |   |              |   |      |   |         |    |
|                                                          | Basic and diluted                                                     | $      | (0.37             | )      | $         | (4.57  | )            | $       | (0.60        | ) | $ | (11.30 | ) |
|                                                          |                                                                       |   |                   |   |           |   |              |    |
|                                                          | Weighted average  shares                                              | 23,054 |              | 913    |      | 23,048 |         | 811     |         |
|                                                          |                                                                  |        |              |        |      |        |         |         |         |
|                                                               |                                                                       |        |                   |        |           |        |              |         |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

The accompanying notes are an integral part ofthe condensed financial statements.

 

 

 

**VERSICORINC.STATEMENTS OF CASH FLOWS(UNAUDITED)(IN THOUSANDS)**

       

|                                              | Six  Months Ended                                                            |    |      |
|---------------------------------------------------|------------------------------------------------------------------------------|---------|-----------|
|                                              |                                                                              |    |      |
|                                              | June  30,                                                                    |    | June  30, |   |
|                                              | 2001                                                                         |    | 2001      |   |
|                                              |                                                                              |    |           |   |
| **Cash  flows from operating activities:**        |                                                                         |    |      |   |
|                                              | Net loss                                                                     | $       | (13,808   | ) | $ | (6,292 | ) |
|                                              | Adjustments to  reconcile net loss to net cash used in operating activities: |    |      |   |   |
|                                              | Depreciation                                                                 | 497     |      | 444 |   |
|                                              | Non-cash compensation  expense                                               | 3,304   |      | 4,022 |   |
|                                              | Changes in operating  assets and liabilities:                                |    |      |   |   |
|                                              | Prepaid expenses and  other current assets                                   | (210    | )         | (308 | ) |
|                                              | Employee notes  receivable                                                   | 51      |      | (14 | ) |
|                                              | Other assets                                                                 | (16     | )         | (270 | ) |
|                                              | Accounts payable                                                             | (361    | )         | 129 |   |
|                                              | Accrued liabilities                                                          | 590     |      | 107 |   |
|                                              | Related party payable                                                        | (12     | )         | 24 |   |
|                                              | Deferred revenue                                                             | 937     |      | 398 |   |
|                                              | Other long-term  liabilities                                                 | (957    | )         | (1,000 | ) |
|                                              |                                                                         |         |      |  |   |
|                                              | Net cash used in  operating activities                                       | (9,985  | )         | (2,760 | ) |
|                                              |                                                                         |         |      |  |   |
|                                              |                                                                         |    |      |   |
| **Cash  flows from investing activities:**        |                                                                         |    |      |   |
|                                              | Purchases of  marketable securities                                          | (24,904 | )         | - |   |
|                                              | Sales/maturities of  marketable securities                                   | 19,714  |      | - |   |
|                                              | Additions to property  and equipment                                         | (1,245  | )         | (63 | ) |
|                                              |                                                                         |         |      |  |   |
|                                              | Net cash used in  investing activities                                       | (6,435  | )         | (63 | ) |
|                                              |                                                                         |         |      |  |   |
|                                              |                                                                         |    |      |   |
| **Cash  flows from financing activities:**        |                                                                         |    |      |   |
|                                              | Proceeds from issuance  of common stock                                      | 15      |      | 103 |   |
|                                              | Repayments of  long-term debt                                                | (431    | )         | (431 | ) |
|                                              |                                                                         |         |      |  |   |
|                                              | Net cash used in  financing activities                                       | (416    | )         | (328 | ) |
|                                              |                                                                         |         |      |  |   |
|                                              |                                                                         |    |      |   |
| Net change in cash and  cash equivalents          | (16,836                                                                      | )       | (3,151    | ) |
| Cash and cash  equivalents at beginning of period | 67,989                                                                       |    | 34,619    |   |
|                                              |                                                                              |    |           |   |
| Cash and cash  equivalents at end of period       | $                                                                            | 51,153  |      | $ | 31,468 |   |
|                                              |                                                                              |    |           |   |
| **Supplemental  cash flow information:**          |                                                                         |    |      |   |
| Cash paid during the  period for interest         | $                                                                            | 180     |      | $ | 242 |   |
|                                              |                                                                              |    |           |   |
|                                                   |                                                                              |         |           |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

The accompanying notes are an integral part ofthe condensed financial statements.

 

 

 

** **

**NOTES TO CONDENSEDFINANCIAL STATEMENTS**

**1.  BASIS OFPRESENTATION**

    The accompanying interim financialstatements are unaudited and have been prepared in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q. Accordingly, certain information and footnotedisclosures normally included in annual financial statements have beencondensed or omitted. The year-end condensed balance sheet data was derivedfrom audited financial statements but does not include all disclosures requiredby generally accepted accounting principles. The interim financial statements, in the opinion of management, reflectall adjustments (including normal recurring accruals) necessary for a fairpresentation of the results for the interim periods ended June 30, 2001 and2000.

    The results of operations for the interimperiods are not necessarily indicative of the results of operations to beexpected for the fiscal year.  Thesecondensed interim financial statements should be read in conjunction with theaudited financial statements for the year ended December 31, 2000, which areincluded in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2000.

 

**2.  BASIC AND DILUTEDNET LOSS PER SHARE**

    Basic net loss per share is computed usingthe weighted average number of shares of common stock outstanding. Diluted netloss per share does not differ from basic net loss per share since potentialcommon shares are anti-dilutive for all periods presented and therefore areexcluded from the calculation of diluted net loss per share. The followingweighted average potentially dilutive common shares were excluded from thecomputation of net loss per share because their effect was anti-dilutive (inthousands): 

|                                    | Three  Months Ended |   | Six  Months Ended |
|-----------------------------------------|---------------------|--------|-------------------|
|                                    |                     |   |                   |
|                                    | June  30,           |   | June  30,         |   | June  30, |   | June  30, |
|                                    | 2001                |   | 2000              |   | 2001 |   | 2000 |
|                                    |                     |   |                   |   |  |   |  |
|                                    |                |   |              |   |   |   |   |
| Convertible and  redeemable convertible |                |   |              |   |   |   |   |
| preferred stock                         | -                   |   |   16,677     |   |    - |   |    16,677 |
| Stock options                           |   2,663        |   |   1,712      |   |    2,580 |   |    1,644 |
| Common stock warrants                   |   421          |   |   213        |   |    421 |   |    213 |
| Common stock subject  to repurchase     |   13           |   |   17         |   |    14 |   |    18 |
|                                    |                     |   |                   |   |  |   |  |
|                                    |   3,097        |   |   18,619     |   |    3,015 |   |    18,552 |
|                                    |                     |   |                   |   |  |   |  |

 

**3.  RECENT ACCOUNTINGPRONOUNCEMENTS**

    In July 2001, the Financial Accounting andStandards Board (“FASB”) issued Statements of Financial Accounting StandardsNo. 141 (“SFAS 141”), “Business Combinations,” and No. 142 (“SFAS 142”),“Goodwill and Other Intangible Assets.” SFAS 141 requires that all business combinations initiated after June30, 2001 be accounted for under a single method—the purchase method.  Use of the pooling-of-interests method is nolonger permitted.  SFAS 142 requiresthat goodwill no longer be amortized to earnings, but instead be reviewed forimpairment upon initial adoption of the Statement and on an annual basis goingforward.  The amortization of goodwillwill cease upon adoption of SFAS 142. The provisions of SFAS 142 will be effective for fiscal years beginningafter December 15, 2001. Versicor is required to adopt SFAS 142 in the firstquarter of fiscal year 2002.  We believethat the adoption of these standards will have no impact on our financialstatements.

 

 

**ITEM2****.****MANAGEMENT'S DISCUSSION AND ANALYSIS OF****FINANCIALCONDITION AND RESULTS OF OPERATIONS**

    The following discussion of our financialcondition and results of operations should be read in conjunction with thefinancial statements included elsewhere in this Quarterly Report on Form 10-Qand Versicor’s audited financial statements for the year ended December 31,2000 included in our Form 10-K previously filed with the SEC. This QuarterlyReport on Form 10-Q contains, in addition to historical information,forward-looking statements, which involve risk and uncertainties. The words"believe," "expect," "estimate," "may,""will," "could," "plan," or "continue,"and similar expressions are intended to identify forward-lookingstatements.  Versicor's actual resultscould differ significantly from the results discussed in such forward-lookingstatements. See "Factors Affecting Future Operating Results" below.

**OVERVIEW**

    Versicor is a biopharmaceutical companyfocused on the discovery, development and marketing of drugs for the treatmentof serious bacterial and fungal infections, primarily in the hospital setting.  Since our inception on May 2, 1995 as awholly-owned subsidiary of Sepracor Inc., we have devoted substantially all ofour efforts to establishing our business and carrying on research anddevelopment activities related to our proprietary product candidates, includinganidulafungin and dalbavancin, as well as collaborative product candidates.Since 1996, we have been operating as an independent company located inCalifornia.

    On August 8, 2000, we sold 4,600,000shares of our common stock at $11 per share in an initial public offering.  On September 7, 2000, the underwritersexecuted an overallotment option and purchased an additional 690,000 shares ofcommon stock at $11 per share.  We receivedtotal net proceeds from the initial public offering and the overallotment ofapproximately $52.7 million.

    Since we began our operations in May 1995,we have not generated any revenues from product sales.  Our lead product candidate, anidulafungin,is in Phase III clinical trials.  Oursecond product candidate, dalbavancin, is in Phase II clinical trials and wealso have several lead compounds in pre-clinical studies.  Pharmacia Corporation recently startedclinical development of one of our compounds in our oxazolidinone program for whichwe have received a milestone payment.

    Our revenues in the near term are expectedto consist primarily of license fees, milestone payments and collaborativeresearch payments to be received from our collaborators.  These payments are dependent on achievementof certain milestones. If our development efforts result in clinical success,regulatory approval and successful commercialization of our products, we willgenerate revenues from sales of our products and from receipt of royalties onsales of licensed products.

    Our expenses have consisted primarily ofcosts incurred in licensing existing product candidates, research anddevelopment of new product candidates and in connection with our collaborationagreements, and from general and administrative costs associated with ouroperations. We expect our licensing costs to increase as certain milestones areachieved, and our research and development expenses to increase as we continueto develop our product candidates. We also expect that our general andadministrative expenses will increase as we add personnel and continue todirectly assume all of the obligations of a public reporting company. Inaddition, we expect to incur sales and marketing expenses in the future when weestablish our sales and marketing organization.

    We have recorded deferred stockcompensation expense in connection with the grant of stock options to employeesand consultants. Deferred stock compensation for options granted to employeesis the difference between the fair value for financial reporting purposes of ourcommon stock on the date such options were granted and their exercise price.Deferred stock compensation for options granted to consultants has beendetermined in accordance with Statement of Financial Accounting Standards No.123 as the fair value of the equity instruments issued. Deferred stockcompensation for options granted to consultants is periodically remeasured asthe underlying options vest in accordance with Emerging Issues Task Force No.96-18.

    We recorded deferred stock compensation of$1.4 million and $4.7 million for the six months ended June 30, 2001 and 2000,respectively.  These amounts wererecorded as a component of stockholders’ equity and are being amortized ascharges to operations over the vesting periods of the options.  We recorded amortization of deferred stockcompensation of $3.3 million and $4.0 million for the six months ended June 30,2001 and 2000, respectively.

    Since our inception, we have incurredsignificant losses. As of June 30, 2001, we had an accumulated deficit of $84.8million. We anticipate incurring additional losses, which may increase, for theforeseeable future, including at least through December 31, 2002.

    We have a limited history of operations.We anticipate that our quarterly results of operations will fluctuate for theforeseeable future due to several factors, including payments made or receivedpursuant to licensing or collaboration agreements, progress of our research anddevelopment efforts, and the timing and outcome of regulatory approvals. Ourlimited operating history makes predictions of future operations difficult orimpossible.

    In May 1999, we obtained from Eli Lilly anexclusive worldwide license for the development and commercialization ofanidulafungin (formerly known as V-Echinocandin).  We began a Phase III clinical trial for anidulafungin in thefirst quarter of 2001.  We paid $11.0million for the license and have agreed to pay an additional $3 million forproduct inventory of which we have paid $2.0 million.  We are also obligated to make $51.0 million in additionalpayments to Eli Lilly if specified milestones are achieved on the intravenousformulations of anidulafungin. Of the $51.0 million payment obligation for theintravenous formulation, $14.0 million is contingent on developments in theUnited States and Canada, $16.0 million is contingent on developments in Japanand Europe and $21.0 million is contingent on cumulative sales of theintravenous formulation. We are obligated to make $79 million in additionalpayments to Eli Lilly if specified milestones are achieved on the oralformulations of anidulafungin.  We arealso required to pay to Eli Lilly royalties in respect of sales of any productresulting from the compound. We may terminate this agreement at any time bygiving ninety days' written notice. Otherwise, the license terminates on a country-by-country basis as allof our royalty obligations are satisfied in each country.

    In March 1999, we entered into acollaboration agreement with Pharmacia Corporation pursuant to which we arecollaborating to discover second and third generation oxazolidinone productcandidates. In connection with the collaboration, Pharmacia Corporation made anequity investment in us of $3.8 million and paid research support and license feepayments of $1.2 million to us. Under the terms of the agreement, we areentitled to receive additional research support payments, and if specifiedmilestones are achieved, up to $14.0 million in additional milestone paymentsper compound.  We are also entitled toreceive royalties on the worldwide sales of any drug developed andcommercialized as a result of the collaboration.  In October 2000, Pharmacia increased its research supportpayments by approximately 30% and in June 2001 we received a milestone paymentfor the initiation of clinical development of one of the oxazolidinonecompounds.

    In March 1999, we entered into acollaboration agreement with Novartis Pharma AG pursuant to which we arecollaborating to discover and develop novel deformylase inhibitors. Inconnection with the collaboration, Novartis has made a $3.0 million equityinvestment in us and paid $1.3 million in milestone payments to us. Under theterms of this agreement, we are entitled to receive up to $21.0 million inadditional payments from Novartis upon the achievement of specified milestones,a portion of which may be credited against future royalty payments to which weare entitled on the worldwide sales of any drug developed and commercializedfrom this collaboration.

    In February 1998, we entered into twoagreements with Biosearch Italia: a license agreement and a collaborativeagreement. Under the license agreement, Biosearch Italia granted us anexclusive license to develop and commercialize dalbavancin (formerly known asV-Glycopeptide) in the United States and Canada.  In exchange for the license and upon the receipt of favorableresults in pre-clinical studies, we paid $3.0 million and issued 250,000 sharesof our common stock to Biosearch Italia. In May 2001, we began a Phase IIclinical trial for dalbavancin and paid Biosearch Italia an additionalmilestone payment. We are obligated to make up to $8.0 million in additionalpayments to Biosearch Italia upon the achievement of specified milestones. Weare also required to pay Biosearch Italia royalties in respect of sales of anyproduct that results from the compound. Under the collaborative agreement with Biosearch Italia, we establisheda lead optimization partnership called BIOCOR. Biosearch contributes leads andwe contribute our combinatorial and medicinal chemistry expertise to optimizethe leads.

    In June 2001, we entered into an agreementwith Abbott Laboratories.  Pursuant tothis agreement, Abbott has agreed to manufacture, develop and supply commercialquantities of both API (the bulk form of the final active pharmaceuticalingredient for anidulafungin) and ECBN-HC1 (the bulk form of intermediateanidulafungin B nucleus hydrochloride used in the production of API).

 

**RESULTS OF OPERATIONS**

**THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHSENDED JUNE 30, 2000**

**REVENUES**

    Revenues were $1.8 million and $1.6million in the three months ended June 30, 2001 and 2000, respectively.  Revenues consisted of $952,000 and $723,000of collaborative research and development, contract service and license feesfrom Pharmacia Corporation and $861,000 and $837,000 of collaborative researchand development fees and milestone payments from Novartis in the three monthsended June 30, 2001 and 2000, respectively. The increase in revenues in the second quarter of 2001 is due to theincrease in collaborative research and development funding from both PharmaciaCorporation and Novartis.

**RESEARCH AND DEVELOPMENTEXPENSES**

    Research and development expenses were$8.8 million and $2.5 million in the three months ended June 30, 2001 and 2000,respectively.  Research and developmentexpenses include amortization of non-cash stock compensation expense of$682,000 and $(19,000) in the three months ended June 30, 2001 and 2000, respectively.  Excluding these charges, research anddevelopment expenses increased by $5.6 million primarily due to the increase inclinical expenses for the development of anidulafungin which moved into PhaseIII trials in the first half of 2001 and dalbavancin, which moved into Phase IItrials in the second quarter of 2001 and for which we made a one-time paymentto Biosearch Italia, as well as the expansion of our collaborative and internalresearch projects.

**GENERAL AND ADMINISTRATIVEEXPENSES**

    General and administrative expenses were$2.5 million and $2.2 million in the three months ended June 30, 2001 and 2000,respectively.  General andadministrative expenses include amortization of non-cash stock compensation expenseof $893,000 and $1.7 million in the three months ended June 30, 2001 and 2000,respectively.  Excluding these charges,general and administrative expenses increased by $1.1 million primarily due tothe increase in legal, audit, insurance, personnel, and consultant expensesassociated with being a public company.

**OTHER INCOME (EXPENSE)**

    Net interest income was $831,000 and$471,000 in the three months ended June 30, 2001 and 2000, respectively.  The 2001 period reflects greater interestincome as a result of higher cash and investment balances resulting from ourinitial public offering in August 2000.

 

**SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDEDJUNE 30, 2000**

**REVENUES**

    Revenues were $3.3 million and $2.8million in the six months ended June 30, 2001 and 2000, respectively.  Revenues consisted of $1.9 million and $1.4million of collaborative research and development, contract service and licensefees from Pharmacia Corporation in the six months ended June 30, 2001 and 2000,respectively and $1.4 million of collaborative research and development feesand milestone payments from Novartis in both the six months ended June 30, 2001and 2000.  The increase in revenues inthe first half of 2001 is due to the increase in collaborative research anddevelopment funding from both Pharmacia Corporation and Novartis.

**RESEARCH AND DEVELOPMENTEXPENSES**

    Research and development expenses were$14.2 million and $6.2 million in the six months ended June 30, 2001 and 2000,respectively.  Research and developmentexpenses include amortization of non-cash stock compensation expense of $1.2million in both in the six months ended June 30, 2001 and 2000.  Excluding these charges, research anddevelopment expenses increased by $8.0 million primarily due to the increase inclinical expenses for the development of anidulafungin, which moved into PhaseIII trials in the first half of 2001 and dalbavancin which moved into Phase IItrials in the second quarter of 2001 and for which we paid a one-off milestonepayment to Biosearch Italia, as well as the expansion of our collaborative andinternal research projects.

**GENERAL AND ADMINISTRATIVEEXPENSES**

    General and administrative expenses were$4.9 million and $3.9 million in the six months ended June 30, 2001 and 2000,respectively.  General and administrativeexpenses include amortization of non-cash stock compensation expense of $2.1million and $2.8 million in the six months ended June 30, 2001 and 2000,respectively.  Excluding these charges,general and administrative expenses increased by $1.7 million primarily due tothe increase in legal, audit, insurance, personnel, and consultant expensesassociated with being a public company.

**OTHER INCOME (EXPENSE)**

    Net interest income was $2.0 million and$940,000 in the six months ended June 30, 2001 and 2000, respectively.  The 2001 period reflects greater interestincome as a result of higher cash and investment balances resulting from ourinitial public offering in August 2000.

**LIQUIDITY AND CAPITAL RESOURCES**

    We have funded our operations principallywith the proceeds of approximately $78.5 million from a series of six preferredstock offerings over the period 1995 through 1999 and net proceeds ofapproximately $52.7 million from the our initial public offering received inAugust and September 2000.

     As of June 30, 2000, we had receivedapproximately $18.7 million in payments for collaborative research, contractservices and milestone payments, as well as license fees from ourcollaborators, including Sepracor. Of these payments, $2.3 million constitutesdeferred revenue as of June 30, 2001.

    In addition, we have a $6 million termloan agreement with Fleet National Bank. This loan bears interest at the primerate plus 0.50% and is payable in 15 equal quarterly installments of $216,000,with the balance due on December 31, 2002. The net proceeds of this loan wereused to repay Sepracor for leasehold improvements to our facilities and forgeneral corporate purposes. As of June 30, 2001, there was an outstanding loanbalance of $3.9 million.

   Cash used in operations was $10.0 million and $2.8 million in the sixmonths ended June 30, 2001 and 2000, respectively.  The net loss of $ 13.8 million in the first half of 2001 waspartially offset by non-cash charges for depreciation and non-cash stockcompensation of $3.8 million.  In thefirst half of 2000, the net loss of $6.3 million was substantially offset bynon-cash charges for depreciation and non-cash stock compensation of $4.5million.

    Cash used in investing activities was $6.4million and $63,000 in the six months ended June 30, 2001 and 2000,respectively.  The principal use of cashin the first half of 2001 resulted from the net purchases of marketablesecurities as well as capital expenditure of $1.2 million mainly relating toone-time leasehold improvements at our Fremont facility.

    At June 30, 2001, our cash, cashequivalents and marketable securities totaled $74.3 million compared to $85.9million at December 31, 2000.

    We expect to have negative cash flow fromoperations for the foreseeable future. We expect to incur increasing researchand development and general and administrative expenses including expensesrelating to additions to personnel and production and commercializationefforts.  Our future capitalrequirements will depend on a number of factors, including our success indeveloping markets for our products, payments received or made undercollaboration agreements, the timing and outcome of regulatory approvals, theneed to acquire licenses to new products or compounds, the status ofcompetitive products and the availability of other financing. We believe ourexisting cash and cash equivalents and marketable securities will be sufficientto fund our operating expenses, debt repayments and capital requirements for aboutthe next two years.

**RECENT ACCOUNTINGPRONOUNCEMENTS**

    In July 2001, the Financial Accounting andStandards Board (“FASB”) issued Statements of Financial Accounting StandardsNo. 141 (“SFAS 141”), “Business Combinations,” and No. 142 (“SFAS 142”), “Goodwilland Other Intangible Assets.”  SFAS 141requires that all business combinations initiated after June 30, 2001 beaccounted for under a single method—the purchase method.  Use of the pooling-of-interests method is nolonger permitted.  SFAS 142 requiresthat goodwill no longer be amortized to earnings, but instead be reviewed forimpairment upon initial adoption of the Statement and on an annual basis goingforward.  The amortization of goodwillwill cease upon adoption of SFAS 142. The provisions of SFAS 142 will be effective for fiscal years beginningafter December 15, 2001. Versicor is required to adopt SFAS 142 in the firstquarter of fiscal year 2002.  We believethat the adoption of these standards will have no impact on our financialstatements.

**FACTORS AFFECTING FUTUREOPERATING RESULTS**

    Certain information contained in theQuarterly Report on Form 10-Q consists of forward-looking statements. Importantfactors that could cause actual results to differ materially from theforward-looking statements include the following:

 

**RISKSRELATED TO OUR BUSINESS**

**IF WE ARE UNABLE TO DEVELOP AND SUCCESSFULLY COMMERCIALIZEOUR PRODUCT CANDIDATES, WE MAY NEVER GENERATE SIGNIFICANT REVENUES OR BECOMEPROFITABLE.**

    You must evaluate us in light of the uncertaintiesand complexities present in an early stage biopharmaceutical company. All ofour product candidates are in development, and only two are in Phase II orPhase III clinical trials. To date we have not commercialized any products orrecognized any revenue from product sales. We will require significantadditional investment in research and development, pre-clinical testing andclinical trials, regulatory approval, and sales and marketing activities. Ourproduct candidates, if successfully developed, may not generate sufficient orsustainable revenues to enable us to be profitable.

**WE EXPECT TO INCUR LOSSES FORTHE FORESEEABLE FUTURE AND MAY NEVER ACHIEVE PROFITABILITY.**

    We have incurred net losses since ourinception in 1995. Before deemed dividends and accretion to redemption value ofpreferred stock, our net losses were approximately $1.1 million in 1995, $4.8million in 1996, $6.3 million in 1997, $12.6 million in 1998, $29.2 million in1999, $15.3 million in 2000 and $13.8 million in the first half of 2001.  As of June 30, 2001, our accumulated deficitwas approximately $84.8 million. Our losses to date have resulted principallyfrom:

    - research and development costs relatingto the development of our product      candidates;

    - costs of acquiring product candidates;and

    - general and administrative costsrelating to our operations.

    We expect to incur substantial andincreasing losses for the foreseeable future as a result of increases in ourresearch and development costs, including costs associated with conductingpre-clinical testing and clinical trials, and charges related to purchases oftechnology or other assets. We expect that the amount of operating losses willfluctuate significantly from quarter to quarter as a result of increases ordecreases in our research and development efforts, the execution or terminationof collaboration agreements, the initiation, success or failure of clinicaltrials, or other factors.  Our chancesfor achieving profitability will depend on numerous factors, including successin:

    - developing and testing new productcandidates;

    - receiving regulatory approvals;

    - manufacturing products;

    - marketing products; and

    - competing with products from othercompanies.

    Many of these factors will depend oncircumstances beyond our control. We expect to rely heavily on third partieswith respect to many aspects of our business, including research anddevelopment, clinical testing, manufacturing and marketing. We cannot assureyou that we will ever become profitable.

**OUR REVENUES WILL BE SUBJECT TOSIGNIFICANT FLUCTUATIONS, WHICH WILL MAKE IT DIFFICULT TO COMPARE OUR OPERATINGRESULTS TO PRIOR PERIODS.**

    We expect that substantially all of ourrevenues for the foreseeable future will result from payments undercollaboration agreements. To date, these payments have been in the form ofupfront payments, reimbursement for research and development expenses andmilestone payments. We may not be able to generate additional revenues.Furthermore, payments under our existing and any future collaborationagreements will be subject to significant fluctuation in both timing andamount. Our revenues may not be indicative of our future performance or of ourability to continue to achieve additional milestones. Our revenues and resultsof operations for any period may also not be comparable to the revenues orresults of operations for any other period.

**IF WE CANNOT ENTER INTO NEWLICENSING ARRANGEMENTS, OUR FUTURE PRODUCT PORTFOLIO COULD BE ADVERSELY AFFECTED.**

    An important component of our businessstrategy is in-licensing drug compounds developed by other pharmaceutical andbiotechnology companies or academic research laboratories. Competition forpromising compounds can be intense. If we are not able to identify futurelicensing opportunities or enter into future licensing arrangements onacceptable terms, our future product portfolio could be adversely affected.

**IF OUR COLLABORATORS DO NOT PERFORM, WE WILL BE UNABLE TODEVELOP OUR JOINT PRODUCT CANDIDATES.**

    We have entered into collaborationagreements with third parties to develop certain product candidates. Thesecollaborations are necessary in order for us to:

    - fund our research and developmentactivities;

    - fund manufacturing by third parties;

    - seek and obtain regulatory approvals;and

    - successfully commercialize existing andfuture product candidates.

    Only a limited number of productcandidates have been generated pursuant to our collaborations. We cannot assureyou that any of them will result in commercially successful products. Currentor future collaboration agreements may not be successful. If we fail tomaintain our existing collaboration agreements or fail to enter into additionalcollaboration agreements, the number of product candidates from which we couldreceive future revenues would decline.

    Our dependence on collaboration agreementswith third parties subjects us to a number of risks. These collaborationagreements may not be on terms favorable to us. Agreements with collaboratorstypically allow the collaborators significant discretion in electing whether topursue any of the planned activities. We cannot control the amount and timingof resources our collaborators may devote to the product candidates, and ourcollaborators may choose to pursue alternative products. Our collaborators maynot perform their obligations as expected. Business combinations or significantchanges in a collaborator’s business strategy may adversely affect acollaborator’s willingness or ability to complete its obligations under thearrangement.  Moreover, we could becomeinvolved in disputes with our collaborators, which could lead to delays ortermination of our development programs with them and time-consuming andexpensive litigation or arbitration. Even if we fulfill our obligations under acollaborative agreement, our collaborator can terminate the agreement undercertain circumstances. If any collaborator were to terminate or breach ouragreement with it, or otherwise fail to complete its obligations in a timelymanner, our chances of successfully commercializing products would bematerially and adversely affected.

**IF CLINICAL TRIALS FOR OURPRODUCTS ARE UNSUCCESSFUL OR DELAYED, WE WILL BE UNABLE TO MEET OUR ANTICIPATEDDEVELOPMENT AND COMMERCIALIZATION TIMELINES, WHICH COULD CAUSE OUR STOCK PRICETO DECLINE.**

    Before obtaining regulatory approvals forthe commercial sale of any products, we must demonstrate through pre-clinicaltesting and clinical trials that our product candidates are safe and effectivefor use in humans. Conducting clinical trials is a lengthy, time-consuming andexpensive process.

    Completion of clinical trials may takeseveral years or more. Our commencement and rate of completion of clinicaltrials may be delayed by many factors, including:

    - lack of efficacy during the clinicaltrials;

    - unforeseen safety issues;

    - slower than expected rate of patientrecruitment;

    - government or regulatory delays;

    - inability to adequately follow patientsafter treatment; and

    - inability to manufacture sufficientquantities of materials for use in clinical trials.

    The results from pre-clinical testing andearly clinical trials are often not predictive of results obtained in laterclinical trials. A number of new drugs have shown promising results in clinicaltrials, but subsequently failed to establish sufficient safety and efficacydata to obtain necessary regulatory approvals. Data obtained from pre-clinicaland clinical activities are susceptible to varying interpretations, which maydelay, limit or prevent regulatory approval. In addition, regulatory delays orrejections may be encountered as a result of many factors, including perceiveddefects in the design of clinical trials and changes in regulatory policyduring the period of product development.

    As of June 30, 2001, two of our productcandidates, anidulafungin and dalbavancin, were in clinical trials. Patientfollow-up for these clinical trials has been limited and more trials will berequired before we will be able to apply for regulatory approvals. Clinicaltrials conducted by us or by third parties on our behalf may not demonstratesufficient safety and efficacy to obtain the requisite regulatory approvals foranidulafungin and dalbavancin or any other potential product candidates. Thisfailure may delay development of other product candidates and hinder ourability to conduct related pre-clinical testing and clinical trials. Regulatoryauthorities may not permit us to undertake any additional clinical trials forour product candidates. Our other product candidates are in pre-clinicaldevelopment, and we have not submitted investigational new drug applications tocommence clinical trials involving these compounds. Our pre-clinicaldevelopment efforts may not be successfully completed and we may not filefurther investigational new drug applications. Any delays in, or terminationof, our clinical trials will materially and adversely affect our developmentand commercialization timelines, which would cause our stock price to decline.Any of these events would also seriously impede our ability to obtainadditional financing.

**IF OUR THIRD PARTY CLINICALTRIAL MANAGERS DO NOT PERFORM, CLINICAL TRIALS FOR OUR PRODUCT CANDIDATES MAYBE DELAYED OR UNSUCCESSFUL.**

    We have limited experience in conductingand managing clinical trials, and currently only have seven full-time clinicaldevelopment employees.  We rely on thirdparties, including our collaborators, clinical research organizations andoutside consultants, to assist us in managing and monitoring clinical trials.Our reliance on these third parties may result in delays in completing, orfailing to complete, these trials if they fail to perform under the terms ofour agreements with them.

**IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, WE ARE NOTLIKELY TO GENERATE SIGNIFICANT REVENUES OR BECOME PROFITABLE.**

    Even if we obtain regulatory approval tomarket a product, our products may not gain market acceptance among physicians,patients, healthcare payors and the medical community. The degree of marketacceptance of any pharmaceutical product that we develop will depend on anumber of factors, including:

   - demonstration of clinical efficacy and safety;

    - cost-effectiveness;

    - potential advantages over alternativetherapies;

    - reimbursement policies of government andthird-party payors; and

    - effectiveness of our marketing anddistribution capabilities.

    Physicians will not recommend therapiesusing our products until clinical data or other factors demonstrate theirsafety and efficacy as compared to other drugs or treatments. Even if theclinical safety and efficacy of therapies using our products is established,physicians may elect not to recommend the therapies for any number of otherreasons, including whether the mode of administration of our products iseffective for certain indications. For example, many antibiotic or antifungalproducts are typically administered by infusion or injection, which requiressubstantial cost and inconvenience to patients. Our product candidates, ifsuccessfully developed, will compete with a number of drugs and therapiesmanufactured and marketed by major pharmaceutical and other biotechnologycompanies. Our products may also compete with new products currently underdevelopment by others. Physicians, patients, third-party payors and the medicalcommunity may not accept and utilize any product candidates that we or ourcollaborators develop. If our products do not achieve significant marketacceptance, we are not likely to generate significant revenues or becomeprofitable.

**IF WE ARE UNABLE TO ATTRACT ANDRETAIN KEY EMPLOYEES AND CONSULTANTS, WE WILL BE UNABLE TO DEVELOP ANDCOMMERCIALIZE OUR PRODUCTS.**

    We are highly dependent on the principalmembers of our scientific, clinical and management staff. In addition, we havedepended to date on third parties to perform significant management functions.In order to pursue our product development, marketing and commercialization plans,we will need to hire personnel with experience in clinical testing, governmentregulation, manufacturing and marketing. We may not be able to attract and retain personnel on acceptable termsgiven the intense competition for such personnel among high technologyenterprises, including biotechnology, pharmaceutical and healthcare companies,universities and non-profit research institutions. Most of our scientific andmanagement employees do not have employment agreements. If we lose any of thesepersons, or are unable to attract and retain qualified personnel, our business,financial condition and results of operations may be materially and adverselyaffected.

    In addition, we rely on members of ourscientific and clinical advisory boards and other consultants to assist us informulating our research and development strategies. All of our consultants andthe members of our scientific and clinical advisory boards are employed byother entities. They may have commitments to, or advisory or consulting agreementswith, other entities that may limit their availability to us. If we lose theservices of these advisors, the achievement of our development objectives maybe impeded. Such impediments may materially and adversely affect our business,financial condition and results of operations. In addition, except for workperformed specifically for and at our direction, the inventions or processesdiscovered by our scientific and clinical advisory board members and otherconsultants will not become our intellectual property, but will be theintellectual property of the individuals or their institutions. If we desireaccess to these inventions, we will be required to obtain appropriate licensesfrom the owners.  We cannot assure youthat we will be able to obtain such licenses.

**IF OUR THIRD-PARTYMANUFACTURERS FAIL TO DELIVER OUR PRODUCT CANDIDATES, CLINICAL TRIALS ANDCOMMERCIALIZATION OF OUR PRODUCT CANDIDATES COULD BE DELAYED.**

    We do not have our own manufacturingfacilities to produce our product candidates and anticipate that we willcontinue to rely on third parties to manufacture our product candidates and ourproducts. Our contract manufacturers have a limited number of facilities inwhich our product candidates can be produced. These manufacturers have limitedexperience in manufacturing anidulafungin and dalbavancin in quantitiessufficient for conducting clinical trials or for commercialization.

    Contract manufacturers often encounterdifficulties in scaling up production, including problems involving productionyields, quality control and assurance, shortage of qualified personnel,compliance with FDA regulations, production costs, and development of advancedmanufacturing techniques and process controls. Our contract manufacturers maynot perform as agreed or may not remain in the contract manufacturing businessfor the time required by us to successfully produce and market our productcandidates. If our contract manufacturers fail to deliver the requiredquantities of our product candidates for clinical use on a timely basis and atcommercially reasonable prices, and if we fail to find a replacementmanufacturer or develop our own manufacturing capabilities, clinical trialsinvolving our products, or commercialization of our products, could be delayed.

**IF WE FAIL TO ESTABLISHSUCCESSFUL MARKETING AND SALES CAPABILITIES OR FAIL TO ENTER INTO SUCCESSFULMARKETING ARRANGEMENTS WITH THIRD PARTIES, WE WOULD NOT BE ABLE TOCOMMERCIALIZE OUR PRODUCTS AND WE WOULD NOT BECOME PROFITABLE.**

    We intend to sell a portion of ourproducts through our own sales force. We currently have no sales and marketing infrastructure and have noexperience in direct marketing, sales and distribution. Our futureprofitability will depend in part on our ability to develop a direct sales andmarketing force to sell our products to our customers. We may not be able toattract and retain qualified salespeople or be able to build an efficient andeffective sales and marketing force. To the extent that we enter into marketingand sales arrangements with other companies, our revenues will depend on theefforts of others. These efforts may not be successful. If we are unable toenter into third-party arrangements, then we must substantially expand ourmarketing and sales force in order to achieve commercial success for certainproducts, and compete with other companies that have experienced andwell-funded marketing and sales operations.

**IF CIRCUMSTANCES REQUIRE US TOOBTAIN ADDITIONAL FUNDING, WE MAY BE FORCED TO DELAY OR CURTAIL THE DEVELOPMENTOF OUR PRODUCT CANDIDATES.**

    Our requirements for additional capitalmay be substantial and will depend on many factors, some of which are beyondour control, including:

    - payments received or made under possiblefuture collaboration agreements;

    - continued progress of our research anddevelopment of our products;

    - costs associated with protecting ourpatent and other intellectual      property rights;

    - development of marketing and salescapabilities; or

    - market acceptance of our products.

    We have no committed sources of additionalcapital. To the extent our capital resources are insufficient to meet futurecapital requirements, we will have to raise additional funds to continue thedevelopment of our product candidates. We cannot assure you that funds will beavailable on favorable terms, if at all. To the extent that additional capitalis raised through the sale of equity or convertible debt securities, theissuance of those securities could result in dilution to our stockholders.  Moreover, the incurrence of debt financingcould result in a substantial portion of our operating cash flow beingdedicated to the payment of principal and interest on such indebtedness. Thiscould render us more vulnerable to competitive pressures and economic downturnsand could impose restrictions on our operations. If adequate funds are notavailable, we may be required to curtail operations significantly or to obtainfunds through entering into collaboration agreements on unattractive terms. Ourinability to raise capital would have a material adverse effect on ourbusiness, financial condition and results of operations.

**IF WE FAIL TO MANAGE OURGROWTH, OUR BUSINESS COULD BE HARMED.**

    Our business plan contemplates a period ofrapid and substantial growth that will place a strain on our administrative andoperational infrastructure. To date, our management infrastructure has beenvery limited and dependent on third parties, including our former parentcompany, to provide significant administrative and operational assistance. Ourability to manage effectively our operations and growth requires us to expandand improve our operational, financial and management controls, reportingsystems and procedures and to attract and retain sufficient numbers of talentedemployees. We may not successfully implement improvements to our managementinformation and control systems in an efficient or timely manner and maydiscover deficiencies in existing systems and controls.

**IF WE MAKE ANY ACQUISITIONS, WEWILL INCUR A VARIETY OF COSTS AND MAY NEVER REALIZE THE ANTICIPATED BENEFITS.**

    If appropriate opportunities becomeavailable, we may attempt to acquire products, product candidates or businessesthat we believe are a strategic fit with our business. We currently have nocommitments or agreements with respect to any material acquisitions. If we doundertake any transaction of this sort, the process of integrating an acquiredproduct, product candidate or business may result in operating difficulties andexpenditures and may absorb significant management attention that wouldotherwise be available for ongoing development of our business. Moreover, wemay never realize the anticipated benefits of any acquisition. Futureacquisitions could result in potentially dilutive issuances of equitysecurities, the incurrence of debt, contingent liabilities and/or amortizationexpenses related to goodwill and other intangible assets, which could adverselyaffect our business, financial condition and results of operations.

**IF OUR USE OF HAZARDOUSMATERIALS RESULTS IN CONTAMINATION OR INJURY, WE COULD SUFFER SIGNIFICANTFINANCIAL LOSS.**

    Our research and manufacturing activitiesinvolve the controlled use of hazardous materials. We cannot eliminate the riskof accidental contamination or injury from these materials. In the event of anaccident or environmental discharge, we may be held liable for any resultingdamages, which may exceed our financial resources.

 

**RISKSRELATED TO OPERATING IN OUR INDUSTRY**

**IF WE DO NOT COMPETESUCCESSFULLY IN THE DEVELOPMENT AND COMMERCIALIZATION OF PRODUCTS AND KEEP PACEWITH RAPID TECHNOLOGICAL CHANGE, WE WILL BE UNABLE TO CAPTURE AND SUSTAIN AMEANINGFUL MARKET POSITION.**

    The biotechnology and pharmaceuticalindustries are highly competitive and subject to significant and rapidtechnological change. We are aware of several pharmaceutical and biotechnologycompanies that are actively engaged in research and development in areasrelated to antibiotic and antifungal products. These companies have commencedclinical trials or have successfully commercialized their products. Many ofthese companies are addressing the same diseases and disease indications as usor our collaborators.

    Many of these companies and institutions,either alone or together with their collaborators, have substantially greaterfinancial resources and larger research and development staffs than we do. Inaddition, many of these competitors, either alone or together with theircollaborators, have significantly greater experience than we do in:

    - developing products;

    - undertaking pre-clinical testing andhuman clinical trials;

    - obtaining FDA and other regulatoryapprovals of products; and

    - manufacturing and marketing products.

    Developments by others may render ourproduct candidates or technologies obsolete or non-competitive. We face andwill continue to face intense competition from other companies forcollaboration agreements with pharmaceutical and biotechnology companies forestablishing relationships with academic and research institutions, and forlicenses of proprietary technology. These competitors, either alone or with their collaborators, may succeedin developing technologies or products that are more effective than ours.

**IF OUR INTELLECTUAL PROPERTYDOES NOT ADEQUATELY PROTECT OUR PRODUCT CANDIDATES, OTHERS COULD COMPETEAGAINST US MORE DIRECTLY, WHICH WOULD HURT OUR PROFITABILITY.**

    Our success depends in part on our abilityto:

    - obtain patents or rights to patents;

    - protect trade secrets;

    - operate without infringing upon theproprietary rights of others; and

    - prevent others from infringing on ourproprietary rights.

    We will be able to protect our proprietaryrights from unauthorized use by third parties only to the extent that ourproprietary rights are covered by valid and enforceable patents or areeffectively maintained as trade secrets. The patent position of biopharmaceutical companies involves complexlegal and factual questions and, therefore, enforceability cannot be predictedwith certainty. Patents, if issued, may be challenged, invalidated orcircumvented.  Thus, any patents that weown or license from third parties may not provide any protection against competitors.Our pending patent applications, those we may file in the future, or those wemay license from third parties, may not result in patents being issued. Also,patent rights may not provide us with adequate proprietary protection orcompetitive advantages against competitors with similar technologies. The lawsof certain foreign countries do not protect our intellectual property rights tothe same extent as do the laws of the United States.

   In addition to patents, we rely on tradesecrets and proprietary know-how.  Weseek protection, in part, through confidentiality and proprietary informationagreements. These agreements may not provide meaningful protection or adequateremedies for our technology in the event of unauthorized use or disclosure ofconfidential and proprietary information. Failure to protect our proprietaryrights could seriously impair our competitive position.

**IF THIRD PARTIES CLAIM WE AREINFRINGING THEIR INTELLECTUAL PROPERTY RIGHTS, WE COULD SUFFER SIGNIFICANTLITIGATION OR LICENSING EXPENSES OR BE PREVENTED FROM MARKETING OUR PRODUCTS.**

    Research has been conducted for many yearsin the areas in which we have focused our research and development efforts.This has resulted in a substantial number of issued patents and an even largernumber of still-pending patent applications. Patent applications in the UnitedStates are, in most cases, maintained in secrecy until patents issue. Thepublication of discoveries in the scientific or patent literature frequentlyoccurs substantially later than the date on which the underlying discoverieswere made. Our commercial success depends significantly on our ability tooperate without infringing the patents and other proprietary rights of thirdparties. Our technologies may infringe the patents or violate other proprietaryrights of third parties. In the event of such infringement or violation, we andour collaborators may be prevented from pursuing product development orcommercialization.

    The biotechnology and pharmaceuticalindustries have been characterized by extensive litigation regarding patentsand other intellectual property rights. The defense and prosecution of intellectual property suits, U.S. Patentand Trademark Office interference proceedings and related legal and administrativeproceedings in the United States and internationally involve complex legal andfactual questions. As a result, such proceedings are costly and time-consumingto pursue and their outcome is uncertain. Litigation may be necessary to:

    - enforce patents that we own or license;

    - protect trade secrets or know-how thatwe own or license; or

    - determine the enforceability, scope andvalidity of the proprietary rights of others.

    If we become involved in any litigation,interference or other administrative proceedings, we will incur substantialexpense and the efforts of our technical and management personnel will besignificantly diverted. An adverse determination may subject us to loss of ourproprietary position or to significant liabilities, or require us to seeklicenses that may not be available from third parties. We may be restricted orprevented from manufacturing and selling our products, if any, in the event ofan adverse determination in a judicial or administrative proceeding or if wefail to obtain necessary licenses. Costs associated with these arrangements maybe substantial and may include ongoing royalties. Furthermore, we may not beable to obtain the necessary licenses on satisfactory terms, if at all.

**IF WE EXPERIENCE DELAYS INOBTAINING REGULATORY APPROVALS, OR ARE UNABLE TO OBTAIN THEM AT ALL, WE COULDBE DELAYED OR PRECLUDED FROM COMMERCIALIZING OUR PRODUCTS.**

    Our product candidates under developmentare subject to extensive and rigorous domestic government regulation. The FDAregulates, among other things, the development, testing, manufacture, safety,efficacy, record-keeping, labeling, storage, approval, advertising, promotion,sale and distribution of pharmaceutical products. If our products are marketedabroad, they will also be subject to extensive regulation by foreigngovernments. None of our product candidates has been approved for sale in theUnited States or any foreign market. The regulatory review and approval processtakes many years, requires the expenditure of substantial resources, involvespost-marketing surveillance, and may involve ongoing requirements forpost-marketing studies.  Delays inobtaining regulatory approvals may:

    - adversely affect the commercializationof any drugs that we or our      collaborators develop;

    - impose costly procedures on us or ourcollaborators;

    - diminish any competitive advantages thatwe or our collaborators      may attain; and

   - adversely affect our receipt of revenues or royalties.

    Any required approvals, once obtained, maybe withdrawn. Further, if we fail to comply with applicable FDA and otherregulatory requirements at any stage during the regulatory process, we may besubject to sanctions, including:

    - delays in clinical trials orcommercialization;

    - refusal of the FDA to review pendingmarket approval applications or      supplements to approvalapplications;

    - product recalls or seizures;

    - suspension of production;

    - withdrawals of previously approvedmarketing applications; and

    - fines, civil penalties and criminalprosecutions.

    We expect to rely on our collaborators tofile investigational new drug applications and generally direct the regulatoryapproval process for many of our products. Our collaborators may not be able toconduct clinical testing or obtain necessary approvals from the FDA or otherregulatory authorities for any product candidates. If we fail to obtainrequired governmental approvals, we or our collaborators will experience delaysin or be precluded from marketing products developed through our research. Inaddition, the commercial use of our products will be limited.

    We and our contract manufacturers also arerequired to comply with the applicable FDA current good manufacturing practiceregulations. Good manufacturing practice regulations include requirementsrelating to quality control and quality assurance as well as the correspondingmaintenance of records and documentation. Manufacturing facilities are subjectto inspection by the FDA. These facilities must be approved before we can usethem in commercial manufacturing of our products. We or our contractmanufacturers may not be able to comply with the applicable good manufacturingpractice requirements and other FDA regulatory requirements. If we or ourcontract manufacturers fail to comply, we could be subject to fines or othersanctions, or be precluded from marketing our products.

**IF THE GOVERNMENT ANDTHIRD-PARTY PAYORS FAIL TO PROVIDE ADEQUATE COVERAGE AND REIMBURSEMENT RATESFOR OUR PRODUCT CANDIDATES, THE MARKET ACCEPTANCE OF OUR PRODUCTS MAY BEADVERSELY AFFECTED.**

    In both domestic and foreign markets,sales of our product candidates will depend in part upon the availability ofreimbursement from third-party payors. Such third-party payors include government health administrationauthorities, managed care providers, private health insurers and otherorganizations. These third-party payors are increasingly challenging the priceand examining the cost effectiveness of medical products and services. Inaddition, significant uncertainty exists as to the reimbursement status ofnewly approved healthcare products. We may need to conduct post-marketingstudies in order to demonstrate the cost-effectiveness of our products. Suchstudies may require us to commit a significant amount of management time andfinancial and other resources. Our product candidates may not be consideredcost-effective. Adequate third-party reimbursement may not be available toenable us to maintain price levels sufficient to realize an appropriate returnon our investment in product development. Domestic and foreign governmentscontinue to propose and pass legislation designed to reduce the cost ofhealthcare.  Accordingly, legislationand regulations affecting the pricing of pharmaceuticals may change before ourproposed products are approved for marketing. Adoption of such legislationcould further limit reimbursement for pharmaceuticals.

**IF A SUCCESSFUL PRODUCTLIABILITY CLAIM OR SERIES OF CLAIMS IS BROUGHT AGAINST US FOR UNINSUREDLIABILITIES OR IN EXCESS OF INSURED LIABILITIES, WE COULD BE FORCED TO PAYSUBSTANTIAL DAMAGE AWARDS.**

    The use of any of our product candidatesin clinical trials, and the sale of any approved products, may expose us toliability claims and financial losses resulting from the use or sale of ourproducts. We have obtained limited product liability insurance coverage for ourclinical trials. Our insurance coverage limits are $4 million per occurrenceand $4 million in the aggregate. We intend to expand our insurance coverage toinclude the sale of commercial products if marketing approval is obtained forproduct candidates in development. We may not be able to maintain insurancecoverage at a reasonable cost or in sufficient amounts or scope to protect usagainst losses.

**RISKS RELATED TO OWNERSHIP OF OUR STOCK**

**OUR STOCK PRICE COULD BEVOLATILE, AND YOUR INVESTMENTS COULD SUFFER A DECLINE IN VALUE.**

The tradingprice of our common stock is likely to be highly volatile and could be subjectto wide fluctuations in price in response to various factors, many of which arebeyond our control, including:

-             changesin, or failure to achieve, financial estimates by securities analysts;

-             newproducts or services introduced or announced by us or our competitors;

-             announcementsof technological innovations by us or our competitors;

-             actualor anticipated variations in quarterly operating results;

-             conditionsor trends in the biotechnology and pharmaceutical industries;

-             announcementsby us of significant acquisitions, strategic relationships, joint ventures orcapital commitments;

-             additionsor departures of key personnel; and

-             salesof our common stock.

             In addition, the stock market ingeneral, and the Nasdaq National Market in particular, has experiencedsignificant price and volume fluctuations. Volatility in the market price for particular companies has often beenunrelated or disproportionate to the operating performance of thosecompanies.  Further, there has beenparticular volatility in the market prices of securities of biotechnology andpharmaceutical companies.  These broadmarket and industry factors may seriously harm the market price of our commonstock, regardless of our operating performance.  In addition, securities class action litigation has often beeninitiated following periods of volatility in the market price of a company’ssecurities.  A securities class actionsuit against us could result in substantial costs, potential liabilities andthe diversion of management’s attention and resources.

             
**OUR PRINCIPAL STOCKHOLDERS,DIRECTORS AND EXECUTIVE OFFICERS OWN A SIGNIFICANT POTION OF OUR COMMON STOCK,WHICH MAY PREVENT NEW INVESTORS FROM INFLUENCING CORPORATE DECISIONS.**

Our principalstockholders, directors and executive officers currently own a significantportion of our common stock.  Thesestockholders will be able to exercise significant influence over all mattersrequiring stockholder approval, including the election of directors and theapproval of significant corporate transactions.  This concentration of ownership may also delay or prevent achange in control of Versicor even if beneficial to our stockholders anddeprive the stockholders of a control premium for their shares.

**FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.**

             The market price of our commonstock could decline as a result of sales of substantial amounts of our commonstock in the public market, or the perception that these sales couldoccur.  In addition, these factors couldmake it more difficult for us to raise funds through future offerings of commonstock.  There were 23,082,087 shares ofcommon stock outstanding as of August 1, 2001. Of these share outstanding, a substantial number of shares are “restrictedsecurities” as defined in Rule 144. These shares may be sold in the future without registration under theSecurities Act to the extent permitted by Rule 144 or other exemption under theSecurities Act.

 

**ITEM 3.****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

    Our exposure to market risk relates to ourcash and cash equivalents, our available-for-sale securities and our term loanwith a commercial bank.  Ouravailable-for-sale investments are sensitive to changes in interest rates;however such exposure is limited due to the short-term nature of ourinvestments.

 

**PART II****OTHER INFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS**

    We are not a party to any material legalproceedings.

**ITEM2.  CHANGES IN SECURITIES AND USE OFPROCEEDS**

    None.

**ITEM 3.  DEFAULTSUPON SENIOR SECURITIES**

    None.

**ITEM4.  SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**
 (a) On June 7, 2001, the Annual Meeting of  Stockholders of Versicor was held for the purpose of voting on:            (i)   The election of two  Directors to the Board of Directors; and        (ii)   Ratification of the  appointment of PricewaterhouseCoopers LLP as independent auditors for 2001.   (b) The stockholders of Versicor approved the  following matters, with the following votes cast with respect to each  proposal:            (i)   Election of two Directors  to the Board of Directors:
 
**Director****Shares Voted For****Shares Voted Against****Shares Withheld** ****************Timothy J. Barberich15,302,274 -16,800Mark Leschly15,302,274 -16,800
 

             Theother directors whose terms continued after the Annual Meeting are David V.Milligan, Ph.D., George F. Horner III, James H. Cavanaugh, Ph.D., Lori F.Rafield, Ph.D., Christopher T. Walsh, Ph.D. and Richard J. White, Ph.D.

 
        (ii)   Ratification of  PricewaterhouseCoopers LLP as independent auditors for 2001:
 

 
**Shares Voted For****Shares Voted Against****Shares Withheld**************15,315,8741503,050
 

**ITEM5.  OTHERINFORMATION**

    None

**ITEM6.  EXHIBITSAND REPORTS ON FORM 8-K**

             a) Exhibits
  10.1*Versicor Manufacturing, Development and Supply  Agreement between Versicor Inc. and Abbott Laboratories dated June 25, 2001.
* Portions of this exhibit have been omittedpursuant to a request for confidential treatment submitted to the Securitiesand Exchange Commission.

 

             b) Reports on Form 8-K

             Form8-K dated July 11, 2001 reported under Item 5, “Other Events”, the announcementof the adoption of a          shareholderrights plan.

 

 

 

 

 

 

 

 

**SIGNATURES**

    Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.
    **VERSICOR INC.**    Date: August 10, 2001/s/ GEORGE F. HORNER III    George F. Horner III  President and Chief Executive Officer  (Principal Executive Officer)    Date: August 10, 2001/s/ DOV A. GOLDSTEIN, M.D.  Dov A. Goldstein, M.D. Vice President, Finance and Chief Financial  Officer   (Principal Financial and Accounting Officer)
 

**EXHIBIT INDEX**

 
**Exhibit** **Number****Description**  10.1*Versicor Manufacturing, Development and Supply  Agreement between Versicor Inc. and Abbott Laboratories dated June 25, 2001
 

 

* Portions ofthis exhibit have been omitted pursuant to a request for confidential treatmentsubmitted to the Securities and Exchange Commission.

 

** **